Netflix is Playing for the Endgame
(This article originally appeared at Harvard Business Review)
Every now and then, the business world presents us with a lab experiment that we can observe in realtime. Netflix’s announcement that it is splitting off its DVD-by-mail business from its streaming business is just such an experiment. The DVD business will now go by the name Qwikster, and the streaming business will stay under the Netflix brand. It isClayton Christensen’s innovator’s dilemma incarnate, and Netflix is very publicly trying to solve it. Like its 60% price increase did earlier this year, this move is understandably causing consternation amongst some customers. It’s a bold move, one that will cost them in the near term, but Netflix I’m sure has done the calculus and is looking at the endgame 5-10 years out, not 5-10 months.
In his blog post about the split, Hastings says:
“For the past five years, my greatest fear at Netflix has been that we wouldn’t make the leap from success in DVDs to success in streaming. Most companies that are great at something — like AOL dial-up or Borders bookstores — do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.”
Hastings goes on to acknowledge, “It is possible we are moving too fast — it is hard to say.” This is frank admission of the complexity of the strategic landscape. The media content and distribution business is in a period of massive flux, and while we can say with near certainty what the end state will be, near-term predictions are hard to make.
About five years ago I did this somewhat tongue-in-cheek “timeline” of pivot points for a client in the TV business:
Half-jokingly it made the point that there is a giant hairball of complexity, consolidation and confusion that the industry is going to have to go through, but if you can survive that, the obvious end state will be that any piece of media will be available whenever an individual wants, wherever they are, on any device they like. (We’re about half way through the hairball at this point with DVD Rental vs Video-on-Demand being the current pivot point. I over-estimated the speeds at which changes would settle out, but it was never meant to be a precise timeline, just directional.)
Now consider this: there are over 200 job openings at Netflix headquarters alone (compare this to 61 openings at competitor Hulu, at all its locations.) The vast, vast majority of these are for software development of one sort or another to support the streaming business. Netflix is building a platform for the streaming/cloud end game; it is not building for the near term, or DVDs by mail.
On top of the technical skills, Netflix is building an organization tuned to the needs of a disruptive environment. This presentation on Slideshare (embedded below) paints a fascinating picture of Netflix’s culture (the Slideshare account is under Reed Hastings’ name, but I doubt it’s actually his).
Several things are worth pointing out from this lengthy document:
1. Netflix focuses on increasing “talent density” more rapidly than business complexity increases. This means demanding high performance standards of new hires, paying top dollar for them, and then giving them freedom to use their own judgment in a highly dynamic competitive and service environment.
2. It notes, “Sometimes long-term simplicity is achieved only through bursts of complexity to rework current systems.” This is exactly what Netflix is going through at this point, introducing additional complexity for a period in order to bring longer-term simplicity (i.e., focus only on streaming).
3. Netflix’s focus is on “rapid recovery”: recognize problems when they occur and fix them quickly, rather than try to predict every outcome ahead of time. This mirrors Hastings’s statement about possibly moving too fast. The presentation goes on to say, “We’re in a creative-inventive market, not a safety-critical market like medicine or nuclear power. You may have heard preventing error is cheaper than fixing it — Yes, in manufacturing or medicine…but not so in creative environments.” Music to any innovator’s ears. Some will call this naive, and certainly there can be downsides if not handled well with customer service (and Netflix has stumbled in this recently, which Hastings admits, then proceeding to clumsily talk about business models and cost structures in his letter to subscribers). But overall it’s the right approach for this context.
It’s hard to know if this document reflects reality. But I give it the benefit of the doubt for a couple of reasons. First, it’s so thorough and consistent in its message. But more important, when it comes to execution Netflix is an outstanding company (the attention to detail put into its user experience is fanatical), that it is clearly getting the best and the brightest, even though it is not the sexiest of tech companies. Netflix has set itself up with just the right type of smart, nimble, curious, and fearless organization that it needs to thrive and outwit competitors in the challenging times ahead.
Netflix will be roundly criticized from many quarters for its bold move, and it will upset and probably lose many customers. But it’s the long-term endgame that Netflix is playing for. No one ever said self-cannibalization is painless.